Each month that goes by seems to bring a further example of courts applying the Fair Debt Collection Practices Act (FDCPA) in unexpected ways, and expanding lender liability in an unforeseen manner. In May, the Eleventh Circuit Court of Appeals provided the latest example when it held that lenders following bankruptcy rules were, nevertheless, liable under the FDCPA. The decision came in a combined appeal in the cases of Johnson v. Midland Funding, LLC and Brock v. Resurgent Capital Services, L.P., 2016 U.S. App. LEXIS 9478 (11th Cir. May 24, 2016).

In Johnson, the Eleventh Circuit held that debt collectors who file a bankruptcy proof of claim on a debt barred by the statute of limitations are subject to liability under the FDCPA, even though applicable bankruptcy rules permit such filing. The court’s decision hinged on its discussion of the interplay between the Bankruptcy Code (Code) and the FDCPA — a discussion that was touched on but never fully resolved — in the case of Crawford v. LVNV Funding, LLC, 758 F.3d 1254, 1261 (11th Cir. 2014). In Crawford, the Eleventh Circuit held that a debt collector violates the FDCPA by filing a proof of claim in a bankruptcy case on a debt that was known to be barred by the statute of limitations. (The Crawford decision was discussed in the Bankruptcy Update column of the winter 2016 USFN Report. That article is posted in the article library at www.usfn.org.)

The underlying court in Johnson found the FDCPA and the Code in “irreconcilable conflict” because the Code allows all creditors to file a proof of claim on any debt, even if that debt is barred by the statute of limitations, whereas the FDCPA prohibits a “debt collector” from “us[ing] any false, deceptive, or misleading representation or means in connection with the collection of any debt,” including attempting to collect a debt that is not “expressly authorized by the agreement creating the debt or permitted by law” (i.e., a debt barred by the statute of limitations). See also 15 U.S.C. § 1692e, 1692f(1).

The Eleventh Circuit reversed, holding that the Code and the FDCPA can be read in harmony where a creditor meets the FDCPA definition of “debt collector” and the borrower corresponds to the FDCPA definition of “consumer.” In such cases, normal bankruptcy rules do not apply, even though the FDCPA does not expressly supersede the Code. The court stated, “The Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be [barred by the statute of limitations].” Further, “the Code allows creditors to file proofs of claim that appear on their face to be barred by the statute of limitations. However, when a particular type of creditor — a designated ‘debt collector’ under the FDCPA — files a knowingly time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCPA.” In other words, although the Code allows a proof of claim for a debt barred by the statute of limitations to be filed, the FDCPA considers such claims to be a violation when filed specifically by a “debt collector.”

The court portrayed its ruling as narrow, applying only to “debt collectors.” Nonetheless, the FDCPA’s definition of “debt collector” is extraordinarily broad, defining the term to mean “any person who . . . regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” 15 U.S.C. § 1692a(6). The court further restricted its holding such “that the claim be filed by a ‘debt collector’ and that the claim be ‘knowingly’ time-barred.” This logic does little to limit the court’s decision, however. The larger point is that a lender cannot simply follow bankruptcy procedures in bankruptcy court but must instead consider whether the vague standards of the FDCPA apply to impose hidden liabilities upon otherwise lawful conduct specifically sanctioned by the rules of court.

What does this mean going forward and how do creditors proceed in light of this case?
Although the Eleventh Circuit’s ruling specifically pertains to debt barred by the statute of limitations, debt collectors should also be prepared to address potential FDCPA liability in situations where a debt is no longer collectible against a debtor.

• The first question that must be asked prior to filing a proof of claim is, “Are you considered a ‘debt collector’?” If not, the holding in Johnson does not apply as it only extends liability under the FDCPA to “debt collectors.” Still, when and whether mortgage servicers are “debt collectors” under the FDCPA is an undeveloped area of law that can quickly get confusing. Owners of mortgage loans and their servicers are generally not considered to be debt collectors under the FDCPA. However, when loans are acquired in default, the FDCPA does apply to the new owner of that loan. Therefore, lenders and servicers are hard-pressed to ignore the FDCPA in this context without clear legal authority that it is safe to do so. Such authority does not currently exist. When in doubt as to whether you are a debt collector for FDCPA purposes in any context, seek legal advice.

• Once you determine that you are a “debt collector” pursuant to the FDCPA, the second question that must be asked will be, “Is this claim enforceable against the debtor?” In some situations, a debt may not be enforceable against a debtor because it is time-barred by the statute of limitations, as discussed in the Eleventh Circuit’s ruling. A time-barred debt is distinguished from a debt that was discharged in a previously filed bankruptcy; a time-barred debt cannot be collected under state law, whereas a discharged debt releases the borrower’s personal liability on said debt. Reach out to your local counsel to determine the time period of the statute of limitations as it differs state to state.

In other circumstances, the debtor’s liability on a debt may have been discharged in a prior bankruptcy filing. Specifically, if a debtor has filed a Chapter 7 bankruptcy, a signed reaffirmation agreement for the secured debt was not filed and accepted by the court, and the debtor received a Chapter 7 discharge, then the debtor is no longer personally liable on that debt. Keep in mind that this does not preclude a creditor from filing a proof of claim in a subsequent Chapter 13 bankruptcy. (See Johnson v. Home State Bank, 501 U.S. 78 (1991), where the U.S. Supreme Court held that even after the debtor’s personal liability is discharged, the secured creditor still “retains a ‘right to payment’ in the form of its right to the proceeds from the sale of the debtor’s property.”) By filing a proof of claim in a subsequent Chapter 13 bankruptcy, the creditor is entitled to preserve its interest in the property of the estate. However, legal counsel should be consulted to assess the nature of the debt and its enforceability against the debtor prior to filing a proof of claim to ensure the creditor is not violating the FDCPA, as discussed below.

• In situations where a debt is no longer enforceable against a debtor, the third question that should be asked is, “How can a debt collector protect its secured interest in a lien without violating the FDCPA?” Consider situations when a debtor has filed a Chapter 13 bankruptcy and that same debtor’s personal liability on a debt was discharged in a prior bankruptcy. If the debtor has filed a Chapter 13 plan, proposing to maintain the property and cure any pre-petition default, a debt collector must be aware that filing a proof of claim may be a violation of the FDCPA and must take action to prevent potential liability. In those circumstances, a debt collector may want to include disclaimer language on the proof of claim, which acknowledges that the proof of claim is being filed for informational purposes only and that the creditor is not seeking to enforce the debt against the debtor personally, and is merely asserting its lien against the subject property. However, this specific scenario has not been litigated, and the disclaimer language is not a guaranteed approach of negating liability. Alternatively, if the debtor’s Chapter 13 plan calls for surrender of the property that is encumbered by an unenforceable lien, it is recommended that the debt collector file a motion for relief from the automatic stay.

Late-breaking Development in the Eighth Circuit — As this USFN Report was going to print, a decision was filed in Nelson v. Midland Credit Management, Inc., No. 15-2984 (8th Cir. July 11, 2016), which reached a conclusion different from that of the Eleventh Circuit in Johnson v. Midland Funding, LLC. Specifically, in Nelson, the “court rejects extending the FDCPA to time-barred proofs of claim. An accurate and complete proof of claim on a time-barred debt is not false, deceptive, misleading, unfair, or unconscionable under the FDCPA. The district court properly dismissed for failure to state a claim.”

Consequently, there is a split of authority within the circuits. The Eleventh Circuit (Johnson v. Midland Funding decision) encompasses Alabama, Florida, and Georgia. The Eighth Circuit (Nelson decision) is comprised of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.